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3 Reasons Tesla Motors, Inc. Stock Could Fall

Lofty expectations and a sky-high valuation make this market darling a risky bet.

Tesla's (NASDAQ:TSLA) ascent has been breathtaking. From its IPO on June 29, 2010, the electric-vehicle and sustainable-energy company's shares are up a staggering 1,400%.

Yet even the best-performing businesses have risks, and it's important to study the threats that could derail your investments. That way, you can identify the key trends you should be watching so you won't be blindsided by them.

On that note, here are some reasons Tesla's stock may be vulnerable to a fall in the coming years.

Tesla's new Model 3. Image source: Tesla.

Aggressive estimates for the Model 3

To say that the expectations are high for Tesla would be an understatement. The company plans to ramp up production of its new Model 3 to 10,000 vehicles per week in 2018 -- up from a projected 1,500 in the third quarter -- and CEO Elon Musk has said annual demand could eventually surpass 700,000 units. But there are multiple factors that could result in Tesla falling short of these lofty projections.

Massive new shale discoveries in the U.S. and advances in fracking technology have brought about an era of abundant oil. And when oil supplies are high, gasoline prices tend to be low. That's a challenge for electric-vehicle makers -- after all, they enjoy increased demand for their cars and trucks when high gas prices help to make electricity a relative bargain to fuel. Thus, if oil prices fall further and remain low, there may be less demand for Tesla's vehicles than many investors currently expect.

Even if demand for electric vehicles remains strong, there's no guarantee that it will be Teslas that people buy. General Motors' (NYSE:GM) all-electric Bolt became available nationwide in August and is enjoying record deliveries. Another leading EV company, Nissan (NASDAQOTH:NSANY), is launching its redesigned Leaf this month. And Ford(NYSE:F) is ramping up its electric-car program in China, giving evidence that the automobile titan plans to compete more aggressively in the global EV arena. This onslaught of competition could make it difficult for Tesla to hit its sales targets in the years ahead. Moreover, the rapidly growing supply of electric vehicles could pressure Tesla's pricing power and margins.

Key-man risk

Perhaps no other company's fortunes are as closely tied to its CEO as Tesla's. Musk is Tesla's heart, mind, and soul. He has successfully guided the company through a series of seemingly insurmountable challenges. And if Tesla has any chance of getting to where it's trying to go, it will need Musk at its helm.

Motley Fool CEO Tom Gardner says that Musk is the "single biggest superhero on the planet today." Zappos CEO Tony Hsieh describes Musk as the smartest person he's ever met. And Alphabet CEO Larry Page has said that he might consider leaving his personal estate to Musk because of his ideas for changing the world.

Leaders of this quality are not easily replaced. Fortunately for Tesla, Musk has said that he intends "to be actively involved with the company for the rest of [his] life." Yet if an unforeseen event causes Musk to no longer be able to serve as Tesla's CEO, the company's stock price would likely crater on the news.

Priced for perfection

Based on pretty much any traditional metric, Tesla's valuation is extreme. Here's how the company compares to its competitors:

Company

Price-to-Sales Ratio

Price-to-Book Ratio

Tesla

5.78

11.47

General Motors

0.32

1.21

Ford

0.29

1.48

Nissan

0.35

0.90

Data source: Yahoo! Finance.

Tesla is far from a traditional company, and none of the companies above are exactly comparable to the electric-vehicle maker/battery producer/sustainable-energy company. Still, few investors would argue that Tesla's stock is richly priced. In fact, some, such as hedge fund manager David Einhorn, believe the stock has reached bubble levels.

Thus, if Tesla were to disappoint investors in any way -- such as if Model 3 sales were to fall short of estimates -- its shares could get hit hard. And as is typically the case for premium-priced stocks, any significant market pullback may result in an even more severe downturn in Tesla's stock price.

Moreover, if new competition begins to slow Tesla's sales growth or erode its margins, the premium investors have so far been willing to pay for its stock could quickly evaporate. Such a situation would likely result in a sharp fall in Tesla's stock price -- and painful losses for shareholders.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Ford, and Tesla. The Motley Fool has a disclosure policy.

Author

Joe honed his investing skills as an analyst for Stock Advisor, Fool One, Supernova, Million Dollar Portfolio, and Income Investor. He battle-tested his investment philosophy and strategies as portfolio manager of Tier 1, a market-crushing Motley Fool real-money portfolio that delivered 24.58% annualized returns during its existence. Now, Joe’s mission is to pass on what he’s learned -- and what he continues to learn -- as a contributing writer to Fool.com.
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